Roughly five years ago, the federal government under the Conservative Stephen Harper was engaged in a protracted dispute with the Newfoundland and Labrador government of Conservative Kathy Dunderdale. At issue was a $400 million “fisheries fund” – 70 percent of which would come from the federal government and 30 percent from the province. This fund was intended to help Newfoundland adjust to the removal of its minimum processing requirements (MPR), a removal that the European Union was demanding as part of the negotiations around the Comprehensive Economic and Trade Agreement (CETA). Newfoundland apparently thought that an agreement had been reached but it rapidly became clear that there was disagreement about (a) whether the value of the fisheries fund was really $400 million or merely “up to” $400 million, depending on the losses resulting from the lifting of the MPRs; and (b) whether the fund could be used to modernize the Newfoundland fisheries industry or could only be used to help affected workers and firms.

Newfoundland’s minimum processing requirements restrict the export of unprocessed seafood. With the MPRs in place, processing is done in Newfoundland, often in small coastal communities. Their removal, it was argued threatened employment in processing pnalts and therefore the viability of the coastal communities. For European Union trade negotiators, however, the MPRs were a barrier to trade that needed to be removed.

What does all this mean? In my view, the original push for a Newfoundland fisheries fund was simply an explicit attempt by Newfoundland to extract money from the federal government in exchange for its agreement to lift its minimum processing requirements as they applied to the EU.

Writing about this fund in 2014, I pointed out, as had many others, that Newfoundland had leverage in these negotiations because the MPRs could only be removed by the provincial legislature, no matter what the federal government promised the European Union.

But a $400 million fisheries fund was always too big an ask, even split 70-30 between the federal and provincial governments. What would be the cost if the federal government agreed to phase out the requirement, as it eventually did, but the province refused to follow suit? The federal government could potentially be held accountable for damages to EU firms and the reputation of Canada as a reliable trading partner might be (slightly) tarnished; hardly worth a $280 million federal contribution.

The cost to Newfoundland and Labrador of lifting the requirement was never likely to be large. The requirements only had to be lifted with regard to exports to the EU and exports to the EU are only about 10% of Newfoundland’s fishery exports; the US (50%) and China (24%) are far larger markets. Moreover, it is not at all clear that the Newfoundland fish processing plants needed the requirements; the economic case for transporting fish to the EU for processing seems tenuous at best. The benefits to be gained from the reduction in EU seafood tariffs — a prospect that might have been cast into doubt if the MPRs were not lifted — were greater.

Only two years have passed since tariffs on Newfoundland seafood exports to the EU were reduced and, while there are clearly opportunities to increase exports, the eventual impact is difficult to predict. Although price is an important factor in determining export levels, it is not the only factor. More time will have to pass before the effects of tariff reduction are known.

Our paper makes a very simple point. Using a large survey of students who borrowed from the Canada Student Loans Program (CSLP), we show that postsecondary students with permanent disabilities are just as likely to graduate from college or university as students without disabilities.[1] That’s the good news. The bad news is that the data also indicate that students with disabilities are less likely to be employed after they leave school.

The data do not allow us to say much about why this might be true but one obvious possibility is that employers discriminate against people with disabilities. That said, a range of non-discriminatory factors may be at play: people with disabilities who want to work may face higher costs of working or may have to give up benefits based on their disability. These factors will raise the “reservation wage” — the lowest acceptable wage offer — for people with disabilities.

In this piece, I want to review an article published in the March 2018 issue of the ILR Review by Mason Ameri and his colleague that, in my opinion, clearly shows that discrimination is an important cause of the gap in job market performance of people with disabilities.[2]

Of course, the existence of “disability gaps” between those with and without disabilities is not a novel finding. For example, Ameri, citing the work of others, writes that “[a]mong working-age people with disabilities in the United States, only 35% were employed in 2015, compared to 76% of working-age people without disabilities”.

However, to construct a convincing argument that discrimination plays a role in explaining the disability employment gap, researchers should “compare comparables”. That is, they should compare people who are similar in all respects except that some have disabilities and others do not. Professor Stewart and I try to do that (imperfectly) by focusing only on people who have borrowed to attend a college or university and using multivariate techniques to account for other observable differences among people.

One good way to test for discrimination is to conduct a field experiment in which researchers submit fictional job applications for actual jobs.[3] The applications are exactly the same except some reveal that the (fictional) applicants have a disability while others are written to come from applicants without disabilities. For a survey of field experiments used to investigate discrimination (not just discrimination based on disability) see Judith Rich’s survey of the field.

One of the challenges in studying “people with disabilities” is that the range of possible disabilities is enormous and the experiences of people with one sort of disability may be vastly different than the experience of people with another disability. Ameri addresses this challenge by choosing one sort of job — accounting jobs — and two specific disabilities — spinal cord injuries (SCI) and Asperger’s syndrome.[4] That kind of job and those two disabilities were chosen because there is little reason to believe that people with SCI or Asperger’s syndrome are any less productive in accounting jobs than people without disabilities. Indeed, Ameri argues that people with Asperger’s syndrome may have an advantage in doing accounting work.

Ameri submitted applications for 6,016 accounting positions in the United States that were posted on Indeed.com, a well-known job search site. The fictional applicants could either disclose no disability, an SCI, or Asperger’s syndrome. Moreover, half of the applications were written to come from experienced, well-qualified people while the other half were from newly-minted accountants. In sum, each fictional applicant was randomly assigned to be in one of three disability categories and to be either experienced or inexperienced.

Each application was accompanied by a cover letter and a CV. For those in the disability categories, the disability was revealed in the cover letter by explaining that the applicant was actively volunteering in a (fictional) group supporting people with SCI or with Asperger’s syndrome. All other aspects of the applications were identical.

If discrimination existed, it would be reflected in lower employer responsiveness to the applicants with SCI or Asperger’s syndrome. Ameri used two measures of employer responsiveness. One was “active employer interest”, defined to include asking for interviews, asking for more information or providing information about other job opportunities in the firm. The second, far more restrictive measure, was a callback for an interview.

Ameri’s major finding is that employers were less responsive to the fictional applications from people with SCI or Asperger’s syndrome. Overall, there was active employer interest in 6.58 percent of the application indicating no disability and in 4.87 percent of the applications indicating a disability of either type. This gap of 1.71 percentage points was statistically significant. Results were similar when SCI applications and Asperger’s syndrome applications were tabulated separately.

When Ameri looked at the percentage for whom the employer requested an interview, there was still a gap — 2.53 percent for those without a disability compared to 2.25 percent for those with a disability — but the difference was not statistically significant.

A second important result appeared when the results were broken into subgroups according to the number of the firm’s employees. The gap was largest among employers with the less than 15 employees. Such employers are not covered by the Americans with Disabilities Act (ADA), suggesting that such legislation does make a difference.

Ameri points out that their results should not be blithely extrapolated to other kinds of jobs and other types of disabilities. Recall that they chose accounting jobs because many disabilities, both apparent and non-apparent, do not affect on-the-job productivity in such jobs. And they chose SCI and Asperger’s syndrome precisely because, they argue, those disabilities should not affect productivity.

Another potential issue with the study is the way that the fictional disabilities were disclosed. The cover letter explained that the applicants were volunteering in organizations promoting the interests of those with SCI or Asperger’s syndrome. If employers were hesitant about hiring people with disabilities because of potential legal difficulties should the hiring not work out — for example, employers might fear being sued for discrimination — hiring someone already involved with an advocacy organization would exacerbate those fears.

Nonetheless, the Ameri study indicates that discrimination plays a role in causing the gap in labour market success between those with and without disabilities.

Footnotes

[1] Thanks to the Canada Student Loans Program for making the survey data (and linked administrative data) available to us.

[3] The particular type of field experiment used by Ameri is sometimes called a “correspondence experiment.”

[4] Ameri cites two previous field experiments that sent fictional applications to actual job postings. Both found that employers favored applications that did not disclose disability. The French study compared responses to applicants with and without paraplegia. The Belgian study compared responses to applications with and without disclosure of participation in a Flemish disability program.

Hillary Clinton last week announced her plans to deal with a major election issue in the US – the record-breaking level of student loan debt. Her plan, called the New College Compact, is an effort to eliminate the need for students at publicly-funded colleges and universities to borrow to pay tuition and to reduce the burden faced by those already repaying their student loans.

Would this plan work in Canada? Let’s consider two of the major proposals in the Clinton plan.

Grants from the federal government to the states, conditional on eliminating the need to borrow

Under the plan, the US federal government would offer large grants to US states on the condition that they take action to make sure that students do not need to borrow to pay the tuition charged by public post-secondary schools. The states would do this by offering money to their public universities on the condition that they reduce tuition fees enough so that students do not need to borrow to pay them. What the states could not do is reduce state spending on public post-secondary education.

The “debt-free tuition” promised by the Clinton plan is far from a “free college education.” If students want to live on campus, they will have to pay more for room and board than they otherwise would and they might have to borrow to pay those incremental costs. And “debt-free tuition” does not affect the main economic cost of college — the earnings foregone while in school.

What about post-secondary access for low-income students? Students from low-income families already have “debt-free tuition”; Pell grants from the US federal government are enough to cover their tuition.[1] But such students would still be helped by the new plan. Because the states will not be allowed to “count” federal grants to students in their plans to establish debt-free tuition, students from low-income families will not have to use their Pell grants to pay tuition and can instead use them for living expenses.

This sort of cash transfer from the federal level to the provincial level has a long history in Canada. We call it the “federal spending power”. In areas that are acknowledged to be under provincial jurisdiction — health, education, social assistance — the federal government provides cash transfers as long as the provinces agree to minimal conditions. Money flowed to the provinces for post-secondary education under Established Program Financing from 1977 to 1995, under the Canada Health and Social Transfer (CHST) from 1995 to 2004 and, since then, under the Canada Social Transfer.

The major difference between the existing Canadian federal-provincial grants and those envisioned under Clinton’s New College Compact lies in the degree of accountability required. While the Canadian government specifies a “notional allocation” of the CST, suggesting that one-third be spent on post-secondary education, there is no requirement that provinces accept those notions; they can spend the cash on any part of their post-secondary system. The Clinton plan would have more specific conditions, all aimed at ensuring that students at public universities would not have to borrow in order to pay tuition.[2]

The use of the Federal spending power has been enormously controversial in Canada, even with relatively few conditions imposed on the cash transfer. The cash transfers are seen as an overt effort by the federal government to insert itself into areas of provincial jurisdiction. To impose more specific conditions – one example would be requiring that the provinces use the money to substitute grants for the 40 percent of assessed need now met by provincial loans — would doubtless be met with concerted opposition from the provinces.

The provinces are already taking action on their own to deal with the growth in student loan debt. Ontario has a program that limits the maximum amount that each student must borrow each year — any annual borrowing in excess of $7,400 is repaid by a provincial grant. More dramatically, Newfoundland and Labrador has eliminated its provincial student loan program, replacing the loans with grants.

Lowering the interest rates charged on government student loans

A second important component of the Clinton plan is to reduce the interest rates charged on existing student loans. When first proposed in 2014 by Senator Elizabeth Warren, the idea was to make it possible for former students to renegotiate the terms under which they were repaying their student loans, lowering their interest rates to the 3.86% level charged on 2013-2014 government-subsidized loans to undergraduate borrowers.[3] The Clinton plan also proposes to allow borrowers in repayment to renegotiate the fixed rate they were initially charged so that they pay the lower current interest rate.

For no discernible reason, Canadian student loan borrowers face interest rates on their federal loans that are higher than their US counterparts. Since 1995, Canadian borrowers starting repayment have had two choices regarding the interest rate they will be charged: (1) a fixed rate, determined as the prime rate in force when repayment starts, plus 5.0 percentage points; or (2) a variable rate determined as the prime rate in each month plus 2.5 percentage points. Almost all borrowers choose the second option.

At the moment, with the Canadian prime rate at 2.7%, the variable rate on federal student loans is 5.2%, higher than the current US rate for undergraduates of 4.29%. The Table below shows the US and Canadian rates over the past ten years.

Interest Rates on Student Loans in the US and Canada

(1)

(2)

(3)

(4)

Academic Year

Loan rate in Canada

Loan rate in the US

Difference in rates

2006

8.50

6.80

1.70

2007

8.50

6.80

2.70

2008

6.00

6.00

0.00

2009

4.75

5.60

-0.85

2010

5.50

4.50

1.00

2011

5.50

3.40

2.10

2012

5.50

3.40

2.10

2013

5.50

3.86

1.64

2014

5.50

4.66

0.84

Current

5.20

4.29

0.91

Sources: Column (2) The variable rate charged on federal student loans in Canada is the prime rate plus 2.5 percentage points. The rate in the table above is calculated using the December “prime business rate” reported by the Bank of Canada. The Canada Student Loans Program calculates the prime rate to be used for its loans from the rates reported by five major chartered banks; it drops the highest and lowest rates and averages the remaining three. Column (3) is drawn from Smole (2013) and from the US Department of Education and is the rate charged on subsidized Stafford Loans to undergraduate students.

Because the US government currently makes money on student loans — $66 billion on loans issued between 2007 and 2012, according a Government Accountability Office (GAO) report — and would lose that source of revenue, both Senator Warren and candidate Clinton proposed ways to make up lost revenue. Warren would have financed her plan by imposing a minimum tax on high earners; the Clinton plan would be financed by limiting the tax deductions claimed by high-income taxpayers.

The gap in rates suggests that the Canadian federal government is making money on its student loan portfolio but no calculation has been made public.[4] Lowering the rates paid by both past and present student loan borrowers is clearly possible — the provinces have already done it. All the federal government has to do is give up the profits from the business of lending money, at interest to students.[5]

Notes

[1] The College Board publishes information on the net prices faced by students in different kinds of post-secondary institutions. The 2014 edition of their Trends in College Pricing reports (p.25) that “On average, in 2011-12, full-time in-state students at public four-year universities from families with incomes below $30,000 received enough grant aid to cover tuition and fees and have about $2,320 left to put toward room, board, and other expenses.”

[2] In particular, the Clinton plan would “[p]rovide incentive grants to states that commit to ensuring that no student should borrow for tuition and improved affordability for other costs at 4-year public colleges and universities. States will have to halt disinvestment in higher education, ramp up that investment over time, and work with public colleges and universities to cut costs and increase innovation.”

[3] For a review of the contentious debate about the rate of interest charged on US student loans, see Smole (2013).

[4] The profit that the government might make on student loans is a function of many variables other than the interest rate charged. These other variables include, for example, the expected default rate and the level of administrative costs. Indeed, the “headline” of the GAO report is that interest rates cannot be set to ensure that revenues exactly cover costs.

[5] One concern about allowing former students to renegotiate their student loan interest rates is that many of those who would benefit are high income people. For example, law students and medical students face very high tuition fees and generally borrow the maximum available from government-subsidized loan programs. The same is true for US students who attend private colleges, borrow large amounts and then find high-paying jobs. Will these kinds of former students, who are not in dire need of interest relief, benefit disproportionately? For me, this is an empirical issue. Many such people will have already borrowed from other sources (e.g., lines of credit) and repaid their high interest student loans. A tabulation of borrowers in repayment, by level of earnings, would reveal how the benefits of interest reduction will distributed.

Last week, Canada’s latest financial literacy strategy, Count Me In, Canada, appeared, begging the question of how many more cross-country consultations, expert advisory panels and aspirational proposals we will have to endure. Likely many more.

Two points must be understood.

First, what an average family needs to know about basic day-to-day household finance and what it needs to know about managing all of its financial decisions over the long term are qualitatively different. As different as what drivers need to know about filling their gas tanks and what they need to know about fixing their airbag triggering mechanism. Achieving a basic level of financial literacy for all Canadians is a laudable and perhaps even achievable goal. Imagining that Canadians can be taught to understand and manage a complex, fast-changing set of financial instruments is absurd.

Second, firms in financial services industry talk about financial literacy out of both sides of their mouths. Their primary goal is, understandably, to make money. One way they make money is by taking advantage of the lack of financial literacy among their clients — creating complex debt contracts that shroud costly features, exploiting behavioural biases to encourage borrowing for unnecessary consumption, and paying financial advisors to steer clients their way. Hiring a small staff dedicated to financial literacy and donating a few million dollars to financial literacy efforts is a small price to pay if it allows business-as-usual to continue. That effort would backfire, however, if Canadians actually became more financially savvy. Clearly, then, the enthusiastic support of the financial services industry for efforts to improve financial literacy is a good indicator of how unlikely those efforts are to succeed.

In contrast to the heroic aversion to reality of financial literacy enthusiasts, Barrie McKenna makes the industry’s conflict of interest clear. Recognizing the lack of knowledge among their customers, “… financial industry players often exploit [the] knowledge gap by being vague about what they’re selling, and, more importantly, how they’re paid.”

By diverting attention toward financial literacy and away from their own business practices, the industry has thus far resisted any regulation that would limit the extent to which they can exploit the illiteracy of their clients. So let’s forget financial literacy education …. middle-class Canadians will be helped far more and far faster by regulations that require financial advisors to act in the best interests of their clients. Forget financial literacy education … tighten the regulations governing the complexity of mortgage and credit card contracts. Forget financial literacy education … make low-cost, in-person expert advice available to all Canadians.

Of course, I could be wrong. After all, “… the Government of Canada has recently secured a commitment from Canada’s banks to establish a five-year Financial Literacy Partnership Fund of $10 million …” (p.10 of Count Me In, Canada). Perhaps the banks could publish the business case with which they justify this $10 million investment to their shareholders. Maybe the business case would show that bank profits would increase if Canadians made better-informed financial decisions. If so, I’ll stop writing that the industry supports these pipe dreams of financial literacy only to divert the attention of a credulous government from much-needed regulation.

Further reading:

Lauren Willis’ Against Financial Literacy Education” (2008) presents a far better and far more comprehensive argument against financial literacy education than I could ever construct. My apologies for stealing the first three words of her title.

by Saul Schwartz and Jennifer Stewart from the School of Public Policy and Administration at Carleton University

In many ways, it has become easier for people with disabilities to succeed in higher education. For those with physical disabilities, modern technology — computers that translate speech into text, electronic textbooks with changeable fonts, methods for representing material in non-textual ways — has made learning more accessible. For those with non-apparent disabilities (e.g., learning disabilities) support in the form of extra time on tests, or quiet rooms in which to take those tests, has helped to level the playing field. Universities have set up offices devoted to providing appropriate services for students with all sorts of disabilities; these offices not only provide advice but also liaise directly with faculty to ensure that student needs are met.

One consequence of these developments is that the proportion of students with disabilities who graduate from high school, enroll in postsecondary education and obtain a postsecondary credential has markedly increased in recent decades. McCloy and Declou (2013, p. 10) report that, in Ontario, “the percentage of college and university graduates who reported a disability has been increasing since the 1980s, rising from 3 per cent of certificate/diploma graduates and 2.2 per cent of bachelor’s degree graduates in 1986 to 8.7 per cent and 6.6 per cent, respectively, for the 2005 graduating class.”

An important factor in this welcome development was the adoption of “inclusive education” in elementary and secondary schools. Inclusive education has dramatically increased the extent to which those with disabilities are integrated into regular classrooms in regular schools. The proportion of young people with physical disabilities who have graduated from high school is now about the same as the proportion among young people without any disabilities; however, the proportion of high school graduates among young people with non-apparent disabilities, including severe cognitive disabilities, remains lower.

At least some of the observed increase in the proportion of graduates with disabilities is the result of increased reporting of disabilities. For example, because it is now more likely that elementary and secondary school students are diagnosed with learning disabilities, more may identify themselves as having a disability when they get to college or university. In addition, the growth in campus-based services has increased the incentive for students to self-identify because they can now receive meaningful assistance. Finally, the existence of significant government financial aid for students who document permanent disabilities may also have increased the likelihood that such students will self-identify.

While welcome, the increase in educational attainment does not imply that all is smooth sailing for people with disabilities. They may still face higher costs — in terms of time, effort and money — and, as a result, their dropout rate may be higher than for people without disabilities.[1] Perhaps more importantly, if greater educational attainment does not lead to greater labour market success, the underutilization of the talents of this group of Canadians will persist.

Two studies have recently explored the labour market experience of Canadian postsecondary graduates with learning disabilities (Goodfellow, 2014; Holmes & Silvestri, 2011). These authors were particularly interested in the graduates’ experiences on the job. Goodfellow (2013) emphasized the dilemma created when workers with learning disabilities must either: (a) risk stigmatization if they disclose their disability in order to receive accommodation; or (b) avoid stigmatization by not disclosing their disability but then not being given any accommodation. The workers interviewed by Goodfellow avoided disclosing until they felt they had demonstrated their on-the-job competence. Until then, they developed and used strategies to “pass” as not having a disability.

Holmes and Silvestri (2011) also studied Canadian postsecondary graduates with learning disabilities. They surveyed postsecondary graduates who had been formally classified as having a learning disability (LD) according to a standard definition, and then followed up with in-person interviews of 49 of the 125 individuals in their sample. With the caveat that the survey had a very low response rate — the 125 respondents represented about 20 percent of those they attempted to survey — the survey revealed that most respondents (72 percent) felt that their disability affected their on-the-job performance. Perhaps they were slower than colleagues to process information, slower to read and write, less adept at spelling but, nonetheless, only 38 percent had disclosed their disability to their employers. Thus the majority did not seek any accommodation that might have helped them deal with their disabilities. Instead, they adopted low-visibility strategies, often learned from disability services offices, such as arriving at work early and using time management strategies.

While exploring the lived experience of people with disabilities is invaluable, sample sizes are necessarily small and therefore perhaps unrepresentative of broader populations. While survey questions do not typically allow in-depth responses, they can provide much larger and more representative samples and still allow for the exploration of some important types of questions.

Fichten et al. (2012) surveyed a sample of about 1,500 graduates from three large two-year colleges in Canada. The employment rates for graduates with disabilities (about 12 percent of the respondents) were roughly the same as the employment rates for graduates without disabilities.

Data from the 2012 Canadian Survey on Disability suggests that, among people with mild or moderate disabilities, those with a postsecondary degree have labor force outcomes that are comparable to those of those without disabilities. For example, Turcotte (2014, p. 4) writes: “Among university graduates, the employment rate of those with a moderate disability (adjusted for age differences) was 77%, compared with 78% among those with a mild disability and 83% among those without a disability.”

Using a unique survey conducted on behalf of the Canada Student Loans Program (CSLP) in 2009, Jennifer Stewart and I tried to answer questions about the educational attainment and labour force experience of students who had documented a permanent disability in order to be eligible for a grant from the CSLP. Those surveyed included students with and without permanent disabilities, all of whom had first enrolled in a postsecondary institution between 2002 and 2004 and received a loan or grant from the CSLP. Because they were surveyed in 2009, five to seven years after first enrolling, we can assess their educational attainment and their early post-schooling labour force experience. And because we had access to information about the loans and grants issued to the survey respondents, we can also check to see if students with permanent disabilities borrowed more or less than students without such disabilities.

Part II of this blog will present our findings.

[1] See Chambers, Bolton and Sukhai (2013) for a description of the extra costs that people with non-apparent disabilities) face in the postsecondary context.

As part of the recent trade agreement that Canada and the European Union announced in October of 2013, the annual amount of cheese that EU countries will be able to export to Canada will increase by 17,700 metric tons. Under the existing World Trade Organization quota system, the EU has been able to export 13,272 tons of cheese to Canada each year.[1]

This agreement to expand foreign access to the Canadian dairy market is a crack in the walls that protect the Canadian dairy sector. The Canadian dairy industry’s greatest fear is that this crack will expand and bring down the whole system of supply management. Supply management protects milk, egg and poultry producers from imports (and particularly from imports from the US) by tariff rate quotas. With production and price controls further limiting supply, the result is higher prices for Canadian consumers; another result is stable incomes for producers and greater control over quality.

Supply management, however, is antithetical to the push for freer trade that has characterized the trade policies of the Harper government. As Michael Grant of the Conference Board of Canada recently wrote (Grant, 2013):

In trade negotiations, dairy interests are gradually being traded off against export-orientated agricultural sectors. In the case of CETA, some European dairy access to Canada was traded off for Canadian beef and pork access. More generally, agricultural interests are being traded off against other interests, such as manufacturing and trade in services.

A second fear is that the greater inflow of European cheese will threaten the burgeoning group of artisanal Canadian cheese makers because the increased imports are likely to be in the high-end cheese market. Even though the Europeans have a long history of producing fine cheeses, not all believe that they will displace their Canadian competitors. For example, a cheese retailer interviewed by the Toronto Star said that he thought Canadian producers could withstand the new competition. Avrim Pristine said: “I’ve seen the evolution of the cheese industry in Canada. I’m blown away by Canadian product. I don’t see this as a threat” (Benzie, 2013).

Nonetheless, the federal government has promised to “monitor impact and, if needed, provide compensation should a negative impact be observed” (Canada, 2013, p. 10).[2] It is not yet clear whether this would be compensation for the affected firms, for affected workers or for the affected provinces. A year ago, then-Premier of Québec, Pauline Marois said that Québec generally supported CETA but would not ratify the agreement until the nature of the compensation for its dairy sector was made clear (Dolbec, 2013).

This promise of compensation is one of three made by the federal government in connection with the CETA negotiations. A second promise is to compensate all provinces for the higher costs that they will incur because of the longer patent protection offered to the EU pharmaceutical industry. The third promise is the offer a “fisheries fund” worth up to $400 million to compensate that province for removing its minimum processing requirements as they apply to fish and seafood exported to the EU.

The Newfoundland offer has thus far attracted the greatest attention because the federal government has inexplicably claimed that the promised fund can only be used to compensate Newfoundlanders for demonstrable harm, despite a clear statement to the contrary in an exchange of letters between the two governments. In response, the Newfoundland premier, Paul Davis, has said that he will not remove the minimum processing requirements and further stated that “[y]ou can’t trust Stephen Harper’s government” (CBS News, 2014). Given the Newfoundland situation, can the dairy industry trust the federal government to deliver on its promise of compensation?

The Newfoundland situation was confrontational from the outset with Newfoundland explicitly trying to use its control over its minimum processing legislation to gain as much as it could from the federal government in exchange for the elimination of the rules as they pertain to the EU. The exchange of letters is clear enough but does not constitute a formal agreement between the federal and provincial governments.

By contrast, the dairy situation is really about a promise made to the dairy industry, rather than to any particular province. It has been clear to all parties that the compensation was to be for demonstrable harm caused by CETA, although there will doubtless be disputes as to what constitutes “demonstrable harm”. And the federal government has already tasked its Department of Agriculture and Agri-food with the job of estimating the likely harm that might be caused by the dairy sector provisions of CETA. So while provincial political leaders are wise to ask for specific details on the compensation before asking their legislature to ratify CETA, there is reason to believe that some compensation will be forthcoming, if harm in fact occurs.

Note: This piece draws on a research project on which I have been collaborating with Dmitry Lysenko, a recent graduate of Carleton’s PhD Program in Public Policy. The project deals with cases of compensation offered by federal government during EU negotiations. We analyze these cases from the perspective of how trade adjustment assistance has evolved in Canada and how federal-provincial relations in the area of trade policy must operate in the contemporary environment. We hope to publish the results of the project early in 2015.

[1] The story behind these specific numbers is as follows. Under Canada’s supply management system, the federal government sets the amount of cheese that can be imported into Canada. In 1975, Canada establishes a 50 million pound quota for the overall amount of cheese that could be imported. In 1978, that quota was lowered to 45 million pounds (20,412 metric tons) and has remained at that level ever since. When such quotas were banned under the 1994 Uruguay Round Agreement, that same amount became the level of the tariff rate quota to which Canada agreed. Under a tariff rate quota, a certain amount – here, 20,412 tons – is allowed to enter tariff-free but any amount above that is subject to very high tariffs that discourage any significant increase in imports. Until 1995, 60% of the 20,412 tons was reserved for the EU but beginning in 1996, Canada agreed to raise the EU percentage to 66% or 13,372 tons. See Barichello (2000) and Canada (2011). The deal negotiated as part of CETA allows the EU an increased quota, in addition to the existing 13,372 tons, of 16,000 tons of “fine” cheese and 1,700 tons of industrial cheese for a total of 17,700 tons. Apparently fulfilling a previous commitment, Canada also agreed to allocate to the EU another 800 tons from the WTO quota of 20,412 making the overall increase 18,500 tons [see Canada (2013, p. 10)].

[2] CETA contains two other provisions related to the dairy industry. First, Canada has accepted the expansion of EU rights in relation to Geographical Indicators (GI). Previously, only GIs related to wine and spirits (e.g., Cognac) were protected. In CETA, Canada agreed to a set of provisions protecting GI rights related to agricultural products and foodstuffs but negotiated limits to those rights in some important cheese-related cases. In particular, Canada negotiated a modified set of limits on the use of five cheese names — Asiago, Feta, Fontina, Gorgonzola, and Munster. These names can continue to be used by Canadian producers who were using them as of October, 2013. New Canadian producers, however, can use these names only if they are accompanied by expressions such as “kind” or “type”. For example, if a Canadian cheese-maker decides to produce Asiago cheese, the product will have to be named “Asiago-like” cheese. Second, Canadian tariffs on milk protein concentrates (MPC) will be eliminated. MPC are produced by filtering skim milk and consist of a dry — and thus easily transported —substance that contains many of the beneficial properties of milk. MPCs are used in many prepared foods, including infant formula and commercially sold desserts. US exports of MPC already enter Canada duty-free so the harm caused by this provision is not likely to be large. See Canadian Dairy Commission (2011).

The federal government and the government of Newfoundland and Labrador are currently arguing about the nature of an agreement, reached in the spring of 2013, that would compensate Newfoundland for removing its minimum processing requirements (MPRs), something the federal government wanted as part of its trade negotiations with the European Union. The exchange of letters between the two governments (an exchange that is in the public record here) makes the deal clear. The fund was to used both for industry development and as compensation for “demonstrable harm” and was to be worth up to $400 million. Not, as the federal government now claims, only for demonstrable harm and not, as then-Premier Dunderdale claimed in October, 2013, worth the full $400 million.

The tenor of the contemporary discussion in Newfoundland suggests that the federal government is running roughshod over the province in this matter, reneging on its past commitments and pushing its agreement with the European Union (EU) forward without regard to what Newfoundland wants.

But the federal government does not hold all the cards here. The frantic exchange of letters in May of 2013 occurred because the EU was threatening to withdraw its offer to reduce its high tariffs on Canadian fish and seafood unless Newfoundland and Labrador removed its MPRs. Throughout the negotiations to that point, the federal government had pushed the EU to allow the MPRs to stay in place, as Newfoundland had requested.

While the federal government brings international trade agreements into force, it cannot intrude in areas of provincial jurisdiction. Only provincial legislative assemblies can change provincial laws to comply with international trade agreements. That situation is the result of a decision by the UK Privy Council in the 1937 Labour Conventions case. In that case, the Canadian Parliament had passed legislation that would have implemented an agreement that Canada had made as a member of the International Labor Organization. The Supreme Court of Canada was evenly split on the issue of whether Parliament had the authority to impose legislation in areas (such as labour relations) that were constitutionally under the jurisdiction of the provinces and the case was therefore referred to the UK Privy Council, then the last court of appeal. The Privy Council ruled that Parliament did not have the authority to impose such regulations.

The trade agreement with the EU is now in place and can not be easily changed. The EU has promised to reduce its tariffs on fish and seafood to zero and the Canadian government essentially has promised to deliver Newfoundland in the matter of MPRs. But only the government of Newfoundland can change its laws about the MPRs. If the federal government cannot live up to its promise to get the MPRs removed, its credibility as the negotiating body in future trade agreements will be damaged. For that reason, the bargaining power of Newfoundland is now perhaps even stronger than before. In May 2013, its bargaining power was based on EU’s threat to change its offer on fish and seafood tariffs. Now, its bargaining power is predicated on the loss of credibility that the federal government will suffer in its relations with other countries should Newfoundland resist.

The real question here is why the EU was so insistent on having the MPRs removed and why Newfoundland was so insistent on keeping them. It’s hard to see what harm will come to Newfoundland from their removal, except perhaps damage to its processing industry which is located in remote outports with few other sources of employment. But MPRs will be removed only with respect to exports to the EU and those exports currently account for only about 15 per cent of Newfoundland fish and seafood exports. Exports to the United States, the largest importer, will remain subject to MPRs. And it’s hard to see why the EU cares so much about the MPRs, unless it thinks it cannot get enough unprocessed fish and seafood from other Atlantic provinces.

Note: This piece draws on a research project on which I have been collaborating with Dmitry Lysenko, a recent graduate of Carleton’s PhD Program in Public Policy. The project deals with cases of compensation offered by federal government during EU negotiations. We analyze these cases from the perspective of how trade adjustment assistance has evolved in Canada and how federal-provincial relations in the area of trade policy must operate in the contemporary environment. We hope to publish the results of the project early in 2015.